The Australian Dollar came under intense selling pressure last week as home-grown and overseas developments conspired to weigh on the currency in tandem. The move downward began with the unraveling of risk appetite amid fears that the Federal Reserve may begin to scale down its stimulus efforts sooner than expected after minutes from October’s FOMC meeting printed on the hawkish side of investors’ forecasts (as we expected). It was compounded by disappointing economic data out of China as HSBC’s China Manufacturing PMI gauge revealed that factory-sector activity slowed more than economists expected in November.

Reserve Bank of Australia Governor Glenn Stevens put the proverbial nail in the coffin, saying in a much-publicized speech that central bank was “open-minded” about FX market intervention. The RBA chief argued that the currency is above expect levels in the medium term and warned that although officials are still unconvinced about whether the benefits of intervention outweigh the costs, current inaction doesn’t mean the RBA will always remain on the sidelines.

Looking ahead, a quiet domestic calendar is likely to see external forces at the forefront. Fed QE “taper” speculation takes top billing, with a healthy helping of scheduled event risk led by October’s Durable Goods Orders figure and November’s Consumer Confidence report on tap. US economic news-flow has begun to firm anew relative to expectations (according to data compiled by Citigroup). This suggests economists continue to under-price the resilience of the recovery in the aftermath of October’s government shutdown, opening the door for upside surprises to fuel bets on a sooner-rather-than later move to cut back asset purchases. Needless to say, such a turn of events bodes ill for sentiment trends and the Aussie alike.

Also of note, liquidity is likely to turn scarce in the second half of the week as US financial markets shut down for the Thanksgiving holiday. While thin trading conditions can make for muted price, they can likewise amplify volatility in the event that unforeseen headline risk spooks investors. That may encourage traders to book profits on outstanding exposure rather than float positions into the holiday weekend. In the context of recent Aussie selling, the trades to be unwound are likely to be on the short side of the market, which may allow the currency to produce a corrective bounce. - IS

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